Wednesday, February 22, 2012

Greek PSI outcomes tree: credit event probability at 93%

The CAC legislation has been put before the Greek Parliament.

Reuters: Greece said on Tuesday it would pass legislation that would allow it to enforce losses on bondholders who will not take part in a voluntary bond swap plan, also known as PSI, that forms part of its bailout plan.

The vote is set for tomorrow and is expected to pass. It will retroactively change the existing Greek bonds (only those under the Greek law, since a portion is under the UK law) and require two-thirds majority of the outstanding bonds to force the holdouts into taking a haircut (exchange for new bonds.) The ECB/NCBs will be excluded. Given this is an aggregate CAC (not issue by issue), the Greek banks and other "friends of Greece" holders should be able to form a two-thirds quorum (building a "blocking position" will be nearly impossible).

The BNP Paribas diagram below shows possible outcomes with the highlighted boxes representing the most likely scenario. This supports the view that the most likely outcome (as well as two others) will result in a CDS credit event (trigger) - as discussed earlier. Each final outcome on the tree has a precedent: Uruguay, Anglo Irish (bank), Northern Rock (UK lender), and finally Argentina. Only the "Uruguay scenario" does not end up triggering CDS.